The European Central Bank has released its monthly bulletin, which evaluates the European economic situation. In general, the ECB is noticed a slowdown in growth caused mainly by the duties and wars in progress in different parts of the world. Companies are struggling to invest, consumption falls and the economy is therefore not respecting expectations.
However, an unexpected consequence of duties also emerged from the bulletin. The ECB described a scenario in which, due to customs rates, inflation in Europe could go down much more than expected. Good news for consumers, less for the economy in general.
The European economy slows down due to the duties
The monthly ECB bulletin on the European economy of August is not positive. The European Central Bank has found that the duties and in general the uncertainty of the last few months have slowed down the European economy. In the second quarter, what goes from April to June, services and manufacturing did not grow as we would have expected. The text reads:
Recent investigations detect an expansion in the modest complex both in the manufacturing sector and in that of the services. At the same time, the major actual and expected duties, the strengthening of the euro and the persistent geopolitical uncertainty reduce the propensity of companies to invest.
The analysis comes precisely on the day when Trump’s duties at 15% on all European goods entered into force on August 7th. However, negotiations to find altitude of goods to exclude and exemptions are still in progress.
Will the duties drop the inflation?
It is precisely the duties that are at the center of the ECB bulletin. In particular, the analysis focuses on a scenario in which the rates could decrease inflation. The factors that would contribute are different:
- The euro is increasingly stronger towards the dollar, a circumstance that makes imports less expensive;
- The duties and strength of the euro would reduce exports, with more pressure on the internal market;
- The countries that will suffer American duties, such as China, will redirect their exports to Europe.
All this would lead to an overabundance of goods, which could cause prices to collapse. The report, however, also shows a scenario in which the destruction of world supply chains due to wars and climate change could instead lead to an increase in inflation.
Because the drop in inflation is not always good news
The ECB also underlines how, for several months, a satisfactory inflation has been achieved in most months. The price growth rate is around 2% in most of the Member States, including Italy. This threshold is considered ideal by economists, because it shows an active internal question, capable of supporting further economic growth.
If inflation should fall further, these circumstances would be less. The scenarios would then be more similar to those immediately preceding the pandemic, with very low growth and an equally flat inflation, and increasingly lower interest rates.
